SBA proposes tougher penalties for companies that misrepresent their size

October 23, 2011

Contractors who misrepresent their size or status to the government would face much stiffer penalties under a rule proposed by the Small Business Administration earlier this month.

The proposal, an implementation of last year’s Small Business Jobs Act, would make contractors that misrepresent themselves in order to qualify for contracts intended for small businesses or those owned by women, veterans or other disadvantaged groups liable for the full amount of the contracts they win — even if they provide the desired services or equipment.

In the past, erring contractors have successfully argued that despite their ineligibility for a contract, the government had received the benefit of their services or equipment, allowing them to keep some or all of their fees.

Under the new rule, the government would be able to require that the money be returned in full.

The stricter rules are meant to ensure that qualified companies actually receive the contracts designated for them, but some contracting specialists say the mischaracterizations are not always intentional.

“Many times, we’ve seen . . . companies being a little sloppy at it, a little inattentive to it not being as rigorous with the timeliness of their actions,” said Alan Chvotkin, executive vice president and counsel for the Professional Services Council, an industry association. This rule “says if you don’t say on top of your size status responsibilities, there are significant penalties associated with that.”

The proposed rule would require additional online certification of a company’s status and says that when a company bids on a contract reserved for a small or disadvantaged business, it is claiming it is properly certified. Unqualified companies that submit a bid for a reserved contract would be considered to be misrepresenting themselves, and could face fines, imprisonment, suspension or debarment, among other punishments.

It’s not always clear whether a business qualifies as small, said Richard B. Oliver, a partner at McKenna Long & Aldridge, a D.C. law firm that focuses on government contracting. Size standards can differ depending on the procurement, he said, adding that partnerships with other companies whose sizes might change could open a contractor up to risk.

Chvotkin worried that the government may be elevating “procedural perfection over smart contracting.”

The new rule could “dissuade good companies from doing business because of the fear that they would have of making a mistake,” he said.

But he and Oliver said qualified small companies probably will welcome stricter enforcement.

“There are situations where companies play fast and loose with the certifications,” Oliver said. For “the companies who play by the rules, it’s pretty disappointing. In that sense, they might welcome those guys who are blatantly misrepresenting to get their due.”

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